Does IntraSoft Technologies Limited's (NSE:ISFT) PE Ratio Signal A Selling Opportunity?

ISFT's current PE is a cheap 38.24x based on past earnings, which is -201.67505466740096 lower than 77.5x average multiple of the Online Retail. Yes, this cheaper multiple can initially be attractive, but there are many company-specific elements which are not captured in such a static ratio – such as its growth outlook and debt obligations. In this article, I am going to take you through some key things to consider in order to identify which multiple is the most relevant for ISFT’s growing business. Let's dive in.

How much does ISFT earn?

PE is only used when a company is profitable, such as ISFT. This is because using PE to value an unprofitable business is flawed since the company has negative earnings (this will create a negative ratio). Companies like this are often valued based off other relevant factors, using multiples like P/S (price-to-sales) or P/FCF (price-to-free-cash-flow) depending on the business characteristics. Historically, ISFT has always managed to produce positive profits for investors. As earnings forecasts indicate the positive trend will continue, the PE multiple can be an acceptable tool to assess the ISFT’s value, however, there may be a better option.

Is ISFT in a lot of debt?

With a debt-to-equity ratio of 56.02%, ISFT’s debt structure can be improved by reducing the ratio to below 40%. This ratio indicates that for every ₹1 you invest, the company owes ₹0.56 to debtors. Although debt can be a cheaper source of capital, it also brings with it some risks around debt obligations and bankruptcy.

Debt levels matter when valuing the business because in theory ISFT’s share price represents the equity portion only, but its important to account for debt, as debt also contributes to the company’s earnings capacity and risk. The EV/EBITDA multiple, which uses EV as a substitute for share price, allows us to incorporate debt into our valuation. The 26.71x average multiple for the industry indicates that ISFT may be priced at a discount, and whilst the price-to-earnings multiple also showed this, the EV/EBITDA suggests an even greater premium to fair value.

Does ISFT have a fast-growing outlook?

Given that net income is forecasted to grow by 44.78% each year for the next 5 years, growth will be significant if this is realised. The issue with using current earnings in the denominator of a multiple is that it doesn’t reflect this expected growth, which is a setback for trailing multiples. You should pay for what you’re going to get, not what’s already happened. To account for this growth we can use the one-year analyst-consensus future EBITDA (this is a “forward” multiple).

ISFT is appropriately valued when comparing its multiple to the 17.02x industry average. which differs from the overvaluation ISFT’s past EV/EBITDA ratio suggested.

Next Steps:

Looking at relative valuation alone does not give you a complete picture of an investment. There are many important factors I have not taken into account in this article. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

1. Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
2. Past Track Record: Has been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of 's historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.